Sears Holdings Corp (SHLD) Stock Head-Faked the Bulls

The rally in SHLD stock has faded fast, surprising no one

Sears Holdings Corp (NASDAQ:SHLD) stock put up yet another head-fake Thursday morning, with SHLD stock surging as much as much as 12% to a session high of $9.63 after the embattled retailer put up “less bad” second-quarter earnings.

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Shareholders who were wise enough to sell out at Thursday’s peak made out like bandits (or at least recouped more of their losses than others).

Sears stock actually finished the day down fractionally. The market woke up to the fact that SHLD — which announced it is closing an additional 28 Kmart stores — can’t escape the death grip of Amazon.com, Inc. (NASDAQ:AMZN).

Closing stores is nothing new to the Hoffman Estates, Illinois-based chain, which earlier this year said it would shutter 180 Sears and Kmart locations. It’s also not new for Sears, which now has 1,250 total U.S.-based stores, to increase the number of announced closures — something it has done three times this year. On Thursday, the company also announced it lost $251 million in its second quarter, translating to an adjusted loss of $1.16 per share.

At first glance, it seems encouraging that the $1.16 loss beat Street estimates by a whopping $1.32 per share, especially when combined with Q2 revenue of $4.37 billion, which topped forecasts by almost $200 million. But upon further review, Sears offered nothing to celebrate. The top line declined 23% year-over-year, while same-store sales plunged 11.5%, extending SHLD’s streak of double-digit comps declines to three consecutive quarters.

“The retail environment remained challenging, with continued softness in store traffic and elevated price competition, however, we are encouraged that the month of July was the best month of the quarter in terms of comparable store sales performance.”

SHLD: A Loss Is a Loss

Sears is essentially saying that not only is it losing customers, but it can no longer compete on price. Yet it’s also saying this was one of the better July quarters it has had in quite some time.

Why, then, are the store closures necessary?

I asked this question with tongue in cheek, knowing Sears — with a net debt position of more than $4 billion along with a negative $1.5 billion in cash flow — is dying a slow death and it has no choice but to shutter stores.

This new round will be on top of the 180 locations Sears said it planned to close earlier this year. But given the sustained decline in comparable-store sales and cash flow, how much longer can this garage sale of assets continue?

Sears CEO Eddie Lampert attempted to answer that question, saying, “We are making progress on the strategic priorities we outlined earlier this year and remain focused on returning our Company to profitability.” He then added, “The comprehensive restructuring of our operations is delivering cost efficiencies and helping drive improvements to our operating performance.

This scaling-back of assets includes Sears selling Craftsman brand in January to Stanley Black & Decker, Inc. (NYSE:SWK), which fetched an estimated $900 million in proceeds. To be fair, SHLD is not alone in its suffering and selling off assets or closing stores. The company, albeit to a greater extent, is experiencing a retail shift that has taken down the likes of brick-and-mortar peers J C Penney Company Inc (NYSE:JCP) and Macy’s Inc (NYSE:M).

But unlike JCP and Macy’s, Sears doesn’t have the customer loyalty to support the transition.

Bottom Line for SHLD Stock

If you’re a long investor and are still willing to be patient, good luck. The increased store closures — while strategic — will inevitably translate to higher costs and lower sales.

And aside from the closure-related charges, investors must also ask, where will revenue come from?

SHLD stock, which has not shown that it can escape the death grip of Amazon, will struggle to stay above $5 across the next 12 to 18 months at least.

As of this writing, Richard Saintvilus did not hold a position in any of the aforementioned securities.